Teck Resources, a Canadian mining company, has announced plans to spin off its coal business and simplify its share structure. The move will result in the creation of two independent, publicly-listed companies: Teck Metals, which will focus on metals necessary for the transition to green energy, and Elk Valley Resources, which will operate the coal assets. The company will also wind down the dual-class share structure through which Canada’s Keevil family controls the company. Teck’s assets will include copper and zinc mines across the Americas, including the Quebrada Blanca 2 copper project in Chile.
Details of the Separation:
"The Separation is structured as a spin-off of Teck’s steelmaking coal business by way of a distribution of EVR common shares to Teck shareholders. Teck Metals will retain a substantial interest in steelmaking coal cash flows through a transition period in the form of an 87.5% interest in a gross revenue royalty (the “Royalty”) and preferred shares of EVR (collectively, the “Transition Capital Structure”). Under the Transition Capital Structure, Teck Metals will receive quarterly payments consisting of Royalty payments and preferred share redemption amounts that will in aggregate equal 90% of EVR free cash flow."
"Teck shareholders of record as of the applicable distribution record date will receive common shares of EVR in proportion to their Teck shareholdings at an exchange ratio of 0.1 common share of EVR for each Teck share (or approximately 51.9 million total EVR common shares) and approximately $0.39 cash per share for an aggregate of $200 million in cash. Shareholders will be able to elect to maximize the amount of cash or common shares of EVR they receive, subject to proration, through a Dutch auction election process. Details of the election will be set out in the management proxy circular to be provided to Teck shareholders."
Reference linked here.
Transition Period Details
“In consideration for the transfer of the steelmaking coal assets to EVR, EVR will grant the Royalty and issue preferred shares and common shares to Teck Metals. The Royalty is a 60% gross revenue royalty that will be paid quarterly from EVR’s steelmaking coal revenue, subject to free cash flow and minimum cash balance limitations designed to support the financial resiliency of EVR, and should generally generate payments equal to 90% of EVR free cash flow. The Royalty will be payable until the later of (a) an aggregate amount of $7.0 billion in royalty payments having been made, or (b) December 31, 2028. The preferred shares will have an aggregate $4.4 billion redemption amount and a 6.5% cumulative dividend. The preferred shares will be redeemed out of 90% of EVR free cash flow after the Royalty is no longer payable. If not redeemed earlier, the preferred shares will mature 20 years from their date of issue. Assuming a US$185/tonne long-term benchmark steelmaking coal price and a CAD/US dollar exchange rate of 1.30, the Transition Capital Structure could be fully paid in approximately 11 years.”
Initial Thoughts & Reaction:
While I acknowledge that this move is an intelligent way to structure the spin off, the new TECK will not be "green" or environmentally friendly, despite the company's claim to pursue sustainability, since a large portion of it's revenue will still be derived from coal. So despite the fact they won't technically "own" coal, they still get access to virtually all of the coal cash flows in an attempt to “greenwash” the revenue.
This is basically ESG money laundering.
We'll know whether it works or not if TECK re-rates higher, in-line with copper producer peers. Either way, it will be fascinating to watch as the ESG grift continues to grow and companies attempt to navigate their way through it.
Personally, I would not want to own EVR anytime in the near future. Owning TECK is better for the potential re-rate and you still get access to most of the met coal upside to boot.
Please let me know if you have any questions with regards to strategy and positioning, or anything coal related. I try to answer every question.
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Thanks. Very informative
Interesting, I am not familiar with this. What does, "transition period" and "transition capital structure" mean.. is this in existance for a defined period of time, or do they mean it in the ambiguous, "we are transitioning to green" so at some point this revenue will go away?